Sunday, September 28, 2008

NEW YORK (MarketWatch) -- How did I become rich and famous while toiling as a wageslave in the impecunious trade of financial journalism? When my grandchildren askthis question, I will be able to reply: by writing two articles that prevented thefinancial meltdown, and likely recession, of 2008.

Sort of.

I really did co-write the first one, for Forbes magazine on Jan. 4, 1993. TheFederal Reserve Bank of Boston had just published a study purporting to provedefinitively that mortgage lenders were discriminating against minorities, the hotcause of the day.

But when my brilliant co-author, Leslie Spencer, asked the Boston Fed's researchdirector, Alicia H. Munnell, what minority default rates were, she said proudly thatcensus tract data showed that they were equal to whites. When Leslie pointed out thatthis actually proved there was no discrimination, because the lenders had somehowweeded out the credit risks down to the same acceptable level, Munnell wasdumbfounded and had to concede (on tape) that she did not, in fact, have definitiveproof of discrimination at all.

We had discovered a fundamental technical flaw. We sat back and waited for ourPulitzer Prizes.

Nothing happened. The Boston Fed study continued to be cited by press andpoliticians. Alicia Munnell was apotheosized into the Clinton administration.

Partly this was because Forbes magazine, albeit then very successful, just didn'tfigure in the media food chain. Its readership seemed to be confined to 750,000retired dentists. That mattered, in the dark days before the Internet.

But mostly nobody wanted to know. Subsequently, University of Texas economists StanJ. Liebowitz and Ted Day demonstrated that the study's own data was riddled witherrors. Nobody paid any attention to them, either.

That's a bipartisan "nobody," by the way. Questioned later about the Boston Fedstudy, a Bush Fed governor just smirked and said he was sure the banks would makemoney. If anything, pressure on the financial industry to make marginal loansincreased under George II, part of his Latino outreach strategy.

I don't want to say I told them so. But I (we) did.

Of course, the financial industry was all too happy to be pressured. It no doubtfigured it could make commissions and, if there was trouble, the government wouldbail it out.

And guess what?

This brings me to my second rich-and-famous making article, on the 1998Fed-orchestrated bailout of Long-Term Capital Management hedge fund.

Which, I have to admit, I didn't actually write. I could never interest any editorin it. But they were wrong and I was right. (Notice a pattern?) LTCM was the currentbailout in microcosm.

I was fascinated by the LTCM bailout. I couldn't figure out why the Fed needed torescue a relatively small firm. But two excellent books "When Genius Failed" and"Inventing Money," respectively by Roger Lowenstein and Nicholas Dunbar (who reallydo deserve to be rich and famous) provided a lot of damning detail, albeit withoutdrawing conclusions.

Bottom line: LTCM seems to have been bailed out because it was well-connected. Itsconnections were significantly to Goldman Sachs, which in turn was extremelywell-connected to federal government. Its former CEO, Robert Rubin, was TreasurySecretary at the time.

By an amazing coincidence, another former Goldman CEO, Henry Paulsen, isorchestrating the current bailout.

Significantly, the books revealed that LTCM has made itself the "chosen instrument"of, for example, the Italian government in its efforts to groom the Italian bondmarket in order to join the Euro. LTCM repeatedly cornered the Italian bond marketwith the Italian government's tacit connivance, even though this was devastating toItalian small investors.

Dunbar wrote of LTCM that by the end of 1997: "Governments treated it as a valuedpartner, to be used whenever markets weren't efficient enough to achievemacroeconomic goals."

My questions: What governments? What goals? Are subprime mortgages just a laterexample?

How long has this sort of collusion been going on?

After the Panic of 1907, the U.S. Congress set up the Pujo Committee to investigatethe so-called "money trust."

Of course, that resulted in the Federal Reserve, which arguably is now part of theproblem.